Corporation Tax Act 2009 section 356

Exception to section 354: swapping debt for equity

Section 356 provides an exception to the general rule that prevents connected companies from recognising impairment losses or release debits on loans between them, where the debt is discharged in exchange for shares in the debtor company.

• Where a debtor company's loan is discharged by issuing its own ordinary shares (or an entitlement to such shares) to the creditor company, the normal restriction on recognising impairment losses or release debits between connected companies may be disapplied.
• Three conditions must all be met: the creditor company must treat the liability as discharged; the discharge must be in exchange for ordinary shares (or entitlement to shares) in the debtor company; and the two companies must not have been connected before the creditor acquired the shares or any entitlement to them.
• The purpose of the third condition is to ensure the exception only applies where the connection between the two companies arose because of the debt-for-equity swap itself, rather than being a pre-existing relationship.
• When all three conditions are satisfied, the creditor company can bring the impairment loss or release debit into account for corporation tax purposes, despite the companies now being connected.